CANADA FX DEBT-C$ firms modestly as inflation rate picks up

Fri May 23, 2014 9:31am EDT

* Canadian dollar at C$1.0881, or 91.90 U.S. cents
    * Bond prices higher across the maturity curve

    By Leah Schnurr
    TORONTO, May 23 (Reuters) - The Canadian dollar firmed
modestly against the greenback on Friday after data showed the
domestic annual inflation rate picked up as expected in April,
though the currency traded in a small range.
    So far in May, the Canadian dollar has largely moved
sideways as analysts weigh generally improving economic data
against the Bank of Canada's neutral policy stance. The central
bank shifted away from its hawkish bias last October, an action
that has pressured the loonie.
    The Bank of Canada has expressed concern about low
inflation, but Friday's data showed the annual rate rose in
April to the central bank's 2 percent target for the first time
in two years. 
    While the data was positive for the Canadian dollar, a
substantially stronger currency would likely be met with
pushback from the Bank of Canada, said Camilla Sutton, chief
currency strategist at Scotiabank in Toronto. The central bank
is hoping to see the export sector pick up.
    "So all in all, we're likely to see the Canadian dollar
trade in a fairly tight range," said Sutton. "I think we're
either side of C$1.10. We're sitting a little bit stronger than
that right now, but I think we'll be either side of C$1.10 for
the next couple of months."
    The Canadian dollar was at C$1.0881 to one U.S.
dollar, or 91.90 U.S. cents, stronger than Thursday's close of
C$1.0893, or 91.80 U.S. cents.
    In the long run, a firmer inflation picture could give the
loonie some modest support if it prompts the Bank of Canada to
alter its stance, said Mark Chandler, head of Canadian fixed
income and currency strategy at Royal Bank of Canada in Toronto.
    "They have certainly a dovish (tone) to their neutral bias; 
that has to change to something more fundamentally neutral,"
said Chandler. 
    "In the end, that could lend some marginal support to the
Canadian dollar for domestic reasons, but I still think the
biggest driver for the Canadian dollar will continue to be
what's going on outside our borders, if the U.S. dollar remains
strong."
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 1 Canadian cent
to yield 1.052 percent and the benchmark 10-year up
12 Canadian cents to yield 2.314 percent.

 (Additional reporting by Andrea Hopkins; Editing by Steve
Orlofsky)
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